Welcome to the Time Warner First Quarter 2012 Earnings Conference Call. My name is Hilda, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Doug Shapiro, Senior Vice President of Investor Relations. Mr. Shapiro, you may begin.

[Technical Difficulty]

Douglas Shapiro

Our 2012 business outlook. Before we begin, there are 2 items I need to cover. First, we refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and trending schedules. These reconciliations are available on our website at timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that's available on our site.

And second, today's announcement includes certain forward-looking statements which are based on management's current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors. These factors are discussed in detail in Time Warner's SEC filings, including its most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Time Warner is under no obligation and, in fact, expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Thanks. With that, let me turn the call over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug. Good morning, everyone. Our first quarter results put us in a great position to achieve our financial goals for the year. We grew revenue 4%. We grew adjusted operating income 6%, and we grew adjusted EPS by 16%. And while these results were very good, they understate the strength of the fundamentals underlying our businesses.

Let me give you a sense of what I mean, starting with Turner where we're seeing great momentum at many of our networks. This quarter, TBS was up over 30% in prime time in adults 18 to 49, making it the #1 network on all cable for the first time in a decade.

The Big Bang Theory is performing fantastically. It was the #1 sitcom on cable this quarter, and it more than doubled the delivery in its timeslot. And it's helping to lift ratings across the schedule.

Conan, for instance, has grown viewership for each of the past 6 months and now outdelivers every other late-night talk show in adults 18 to 34. These ratings also provide a great platform from which to launch new originals. TBS will debut several scripted comedies this year: Men at Work later this month, Sullivan & Son in July and the Wedding Band in December. And we'll add unscripted originals starting early next year. Or consider truTV that just delivered its most-watched quarter ever for men 18 to 34, and it was a top 10 entertainment network in delivery of men 18 to 49.

Cartoon Network is also showing great momentum, driven by the popularity of shows like Adventure Time and Regular Show. And lately, it's one of the only kids' networks that's growing. During the quarter in which both of our major competitors declined, Cartoon's viewership among kids 6 to 11 grew 14%. And Cartoon's sister network, Adult Swim, is also posting great numbers. It, too, just completed its most-watched first quarter ever and, again, ranked #1 among all cable for delivery of young adults demos.

The one exception among our entertainment networks was TNT where, as we anticipated, ratings remained challenged in the quarter. Nevertheless, we're confident we'll see improvements starting next month. And by the back half of this year, we expect ratings to be up over last year.

In June, we'll have the first refresh of our prime time acquired programming on TNT in several years as we begin to strip The Mentalist. We'll also debut 4 new originals shows this summer: Dallas, The Great Escape, Perception and Major Crimes. And we'll bring back some of our highest-rated originals including Rizzoli & Isles and Falling Skies, plus the final episode of The Closer.

At the same time, we're continuing to see fantastic performance from our sports programming at TNT, TBS and tru. The NBA on TNT was up for the fifth straight year, making it the highest rated in the network's 28-year history with the league. It's now abundantly clear that the delayed season did not dampen fans' enthusiasm at all.

We're also extremely pleased with the NCAA men's basketball tournament, which has exceeded in every way the expectations we had when we signed the contract 2 years ago. In addition to strong ratings, we continue to see great demand from advertisers and very strong performance from our digital properties.

On our news networks, CNN faced extremely hard comparisons against the events in Japan and the Middle East in the first quarter last year. But that's the nature of the news cycle. Propelled by its brand and global newsgathering capabilities, CNN is still the place where more viewers turn when there's hard news. That was evidenced this quarter when CNN was #1 among 18 to 34s on primary nights. And HLN was the only cable news network to see growth in prime time compared with the first quarter of 2011. It was up 7% over last year.

So overall, we feel really good about the momentum we're seeing across Turner's Networks. That underscores the value that we provide to viewers, advertisers and our affiliates. It puts us in a great position as we head into the upfront, and it gives us great confidence as we enter our next cycle of affiliate negotiations at Turner.

Over the next few years, we'll negotiate tariff renewals for all of our networks, with almost all of our affiliates. We have a number of renewals set for next year, and we will just about finish the process by the end of 2016. We believe strongly that many of our brands are substantially undervalued today. In this next round of affiliate negotiations, we will be very aggressive and correct that. So as we look out to 2014 and beyond, we expect Turner's domestic affiliate fees to grow at a considerably higher rate than they have during the past several years.

I'll turn now to HBO where we're also seeing incredible momentum with our content. In recent quarters, I've said that HBO's programming is arguably better today than it's ever been. I'd like to retract that statement. Now, there's no argument. We just debuted the second season of Game of Thrones to fantastic ratings. This year, the series is averaging over 11 million viewers. That's compared to a little over 9 million on average for the first season. And that makes it the third most popular show ever on HBO, behind only The Sopranos and True Blood.

We're also very excited by a trio of new shows on HBO. Girls from Lena Dunham and VEEP with Julia Louis-Dreyfus are generating tremendous spots. And in June, we'll debut The Newsroom from Aaron Sorkin.

During the quarter, we accelerated the rollout of HBO GO. HBO GO is now available to virtually all of the domestic HBO sub base. We also launched on Microsoft's Xbox and on Samsung connected TVs, and we'll be announcing additional platform launches in the next few months.

Until now, the vast majority of users have accessed GO online or on tablets or mobile devices. We expect to see even higher usage as it becomes widely accessible on connected TVs. And while it's still early days, we're seeing encouraging signs that HBO GO will have a significant positive impact on our business over time.

Consumers using GO are watching HBO more than the they used to, and 93% say GO makes them more loyal to HBO. A second part to the consumer excitement around GO, we're also seeing a bigger marketing push from many of our affiliates. And in fact, HBO is now better positioned and promoted than it has been in years.

Now I'll shift to Warner Bros., which is also on a roll. As we've discussed with you before, our TV Production business had a great 2011-2012 season. In addition to strong performances from some of our previous returning shows like The Big Bang Theory, Two and a Half Men, The Voice, Mike & Molly and The Mentalist, we also produced the #1 new comedy of the season, 2 Broke Girls, and the #2 new drama, Person of Interest. So we'll have an extremely strong slate of returning shows heading into the fall.

And while it's a little early to make predictions, we are in as strong a position as ever heading into this year's pilot season. We also saw solid performances from our film slate this quarter. Journey 2: The Mysterious Island and Project X handily exceeded our expectations. Notably, both Journey 2 and Sherlock Holmes: Game of Shadows surpassed their predecessors at the global box office, which is yet more evidence of Warner's skill at managing film franchises. And while Wrath of the Titans didn't perform as well as we'd hope domestically, it's doing very well internationally.

Looking out over the course of the rest of the year, we're really excited about our slate and several big releases in particular. Next week, we'll premiere Dark Shadows with Johnny Depp from Tim Burton. And of course, later in the year, we'll release 2 of the most hotly anticipated films of 2012: The Dark Knight Rises and the first installment of The Hobbit.

So summing up, it's early in the year, but we're off to a great start. The underlying fundamentals of nearly all our businesses are getting stronger. That makes us even more confident that we'll achieve our financial goals in 2012 and continue to post attractive growth in the coming years.

With that, I'll hand it off to John.

John K. Martin

Thanks, Jeff, and good morning. During my remarks, I'll refer to a presentation that is now available on our website. The first slide shows the highlights from the quarter.

Coming into this year, we set a goal to deliver double-digit adjusted earnings per share growth again. With 16% growth in the first quarter, we're obviously off to a great start. And as Jeff highlighted, we're seeing momentum across almost all of our businesses, which makes us even more confident that we'll be able to maintain attractive levels of growth this year and into the foreseeable future.

During the first quarter, revenues were up 4%, which was a result of growth across all major sources of revenues. Adjusted operating income grew 6% and margins moved up modestly despite a $35 million impairment associated with the cancellation of the HBO series, Luck. We were able to do that due to continued cost controls across our businesses, including holding SG&A costs flat year-over-year.

Moving down the P&L, adjusted earnings per share rose 16%. Please note that our tax provision this quarter included a nearly $30 million reserve related to a potential resolution of a tax dispute. So the effective tax rate was higher this quarter than it has been previously. Going forward, we continue to expect that our effective tax rate should remain somewhere around 35%.

Growth in adjusted EPS was helped by our ongoing share repurchase program, which underscores our continued commitment to provide direct returns to shareholders. During the quarter, we repurchased about $730 million of our shares, and we paid over $250 million in dividends.

So with all that said, we're very much on track to meet our financial goals for the year. And this morning, we reaffirmed our full year outlook for low double-digit growth in adjusted EPS in 2012.

So let me move on to a discussion of our business segments, and let me begin at Networks where overall growth rates were somewhat modest in the first quarter. But underneath that, Turner was up double-digits year-over-year in adjusted operating income, and margins were up 200 basis points. And that was partially offset by a year-over-year decline at HBO, which had difficult comparisons to the second-cycle domestic cable syndication of Sex and the City last year, as well as the impairment that I just mentioned.

Subscription revenues at the Networks segment grew in the mid-single digits, which was driven by higher domestic rates at both Turner and HBO. Turning to advertising. Revenues were up 6% year-over-year, and that's a little bit better than we expected when we were coming into the quarter.

There were some items affecting growth in both directions in the quarter. But if you look through those core domestic growth rates, we're pretty close to the 6% that we reported. For instance, as we've discussed with you before, due to the NBA lockout, we haven't been able to monetize the NBA games at the same level this year as we did last year. So that hurt growth somewhat in the quarter, but that was offset by the timing of a couple of NCAA tournament games, as well as the timing of when Easter hit this year.

Moving over to international. International revenues grew mid-single digits, and that would have been up double digits if it weren't for the year-over-year negative impact related to Imagine, which is our general entertainment network in India, as well as unfavorable foreign exchange rates.

As you may have seen, this quarter, we've decided to shut down Imagine. We're having great success in many international territories and, including our HBO joint ventures, we still expect our international networks business to generate $1 billion in adjusted operating income by 2014. We're also launching new networks where we see opportunities like HBO Netherlands. But Imagine was not succeeding, so we decided to redirect resources elsewhere. Keep in mind that although we were losing a lot of money at Imagine, it generated about $30 million in advertising revenue over the trailing 4 quarters. So shutting it down will actually improve profitability, but it will be a drag of 50 to 100 basis points per quarter on ad revenue growth for the next year.

Looking to the second quarter, the domestic scatter environment looks pretty steady. We're seeing double-digit price increases over the upfront and very strong demand for our sports properties. And while it's still early, solid pricing and low cancellations are positive indicators for this year's upfront.

Setting aside a number of items, advertising growth in Q2 should be as high or higher than the 6% pace we reported in the first quarter. But reported ad growth will likely be somewhat lower. The timing of NCAA games and Easter this year and the shutdown of Imagine will both be a drag in the second quarter.

In addition, in line with our announcement last November, this quarter management of our digital sports properties, including SI.com and Golf.com shifted back over to Time Inc. And that will be a drag on Networks ad growth of about 100 basis points in each of the next 4 quarters in our Networks division. But, of course, that revenue will be recognized at Publishing, so there's no impact to the overall company.

Notwithstanding any quarterly fluctuations in reported ad growth, we feel good about the trajectory of our networks, and we're optimistic that this year's upfront, improved ratings at TNT and the U.S. presidential election will help our performance in the back half of the year.

Adjusted operating income was up 3% in the quarter, which included the impairment for Luck. Excluding that, programming expenses would have been up less than 4% in the quarter and margins would have climbed over last year. And I'll point out that despite the impairment, we still expect to grow adjusted operating income at the Networks segment at a faster rate in 2012 than we did in 2011.

Turning now to film and TV. Warner Bros. has had another great start to a year, with adjusted operating income up almost 40% year-over-year. The increase in adjusted operating income was largely due to growing demand for our television product as evidenced by mid-teens TV growth. That came from both higher television license fees and increased SVOD revenues. And as Jeff described, we're in a great position to drive continued growth from our TV business going forward.

Theatrically, we saw very strong performances from both Journey 2: The Mysterious Island and Project X, and we benefited from the carryover from the fourth quarter release of Sherlock Holmes: A Game of Shadows. Notably, both Sherlock and Journey 2 outperformed the first film in their respective franchises.

So as we look to the rest of the year despite difficult year-over-year comparisons in terms of financial performance, we remain very, very confident that 2012 will be one of the highest years in terms of profitability in Warner Bros.' history.

On to Publishing where both the first quarter revenues and adjusted operating income were down year-over-year. Advertising revenues declined 5% due to softness in domestic magazine advertising. Subscription revenues were down slightly as we continue to see softness in domestic and international newsstand. So with lower revenue, adjusted operating income was down $24 million year-over-year in the quarter.

Looking ahead, we have not seen any material change in the underlying trends for either subscriptions or ad revenue. However, the comparisons are particularly difficult in the second quarter. Recall that last year's second quarter was the only quarter during the year where revenues grew year-over-year.

So given the current revenue environment, we'll obviously be placing continued focus on cost controls here for the remainder of the year. And because of this, as well as easier revenue comparisons in the second half, we expect adjusted operating income growth trends to improve as the year progresses, especially in the back half of the year.

Moving on, the next slide shows our 2012 financial outlook. As I noted earlier, we're off to a great start, and we're on track to deliver another year of double-digit growth in adjusted earnings per share. As we do from time to time, I wanted to offer some perspective as to how the growth will likely come in over the rest of the year.

In terms of progression, our results should be weighted towards the back half of the year and, in particular, the fourth quarter. The second quarter could be somewhat challenged from a year-over-year growth standpoint, and that's a function of a significant intersegment elimination from the Warner Bros. sale of The Mentalist to Turner, as well as continuing challenges at Publishing. Likewise, our film and TV comparisons will be difficult in the third quarter due to last year's syndication sale of Big Bang Theory and the theatrical release of the last Harry Potter film. So both film and TV profitability, as well as overall company growth, will be heavily weighted toward the fourth quarter. This progression is pretty much what we expected as we entered the year. So we feel pretty good about how things are continuing to shape up.

Turning to the next slide, which looks at free cash flow. We generated nearly $320 million of free cash in the quarter. That's down from a year ago, principally due to higher use of working capital. And that was due primarily just to timing related to programming payments at the Networks, as well as higher cash taxes.

As we noted during last earnings, in 2012, we expect to convert about a similar amount of our adjusted OIBDA into free cash. We expect to convert a similar amount this year as we did a year ago.

And on the final slide, which looks at our net debt, we ended the first quarter with $16.6 billion in net debt. That's up about $600 million compared to just the end of last year, and that's due almost entirely to our continued returns to shareholders. We returned almost $1 billion during the quarter, including, as I mentioned earlier, around $730 million in share repurchases.

We've maintained our leverage ratio at around 2.4x, and that's close to our target of 2.5x. So no changes there. And we still believe that 2.5x strikes the right balance of maintaining balance sheet strength while allowing us to continue to invest in our businesses, make acquisitions and return capital to shareholders.

So thank you for listening. And now let me turn the call back over to Doug where we're going to start the Q&A portion. Thanks.

Two questions if I could. First, Jeff, you mentioned you're optimistic about the upfront. I was wondering if you could just maybe talk a little bit about where you think pricing could possibly go and also sellout this year versus last. And then the second question. You guys are about 6 months into the rollout of UltraViolet. So, Jeff, I was wondering if you could just share with us your assessment of the rollout so far? And would you contemplate any changes in the home video business with respect to Windows or pricing of EST.

Jeffrey L. Bewkes

All right, Spencer. On the upfront, basically, it's looking pretty good. Cancellations are low, and scatter pricing is solidly above the upfront. Historically, those are good signs. And if you just think through our Networks, we've got very good momentum. TBS is the #1 cable network in prime time. TNT is about to launch a significant refresh of its programming. truTV and Adult Swim continue to grow with tough-to-reach demos. It really -- both of them are places where it's hard to reach the audience that watch them -- watches them. CNN is going to benefit from the election. And remember, CNN has the widest reach. More people tune in to CNN than any other news network. And Cartoon Network is taking significant viewing share from its competition, probably because a lot of competing cartoon and kids networks have their shows elsewhere, not just on their networks. They're on SVOD services. So I think we're really well positioned. And whatever happens in the upfront generally, we're going to get our fair share or more than that. So we feel very good about that. On UltraViolet, basically, we're happy with the launch. We think it's a big accomplishment for the industry, and it was something that we had tried to do and see if a lot of others would join up. And we think UltraViolet offers a compelling ease-of-use way to access your movies from the cloud and on whatever device you want to use. It's still early, but consumers are downloading and streaming in very large numbers. Just a couple of data points. More than 2 million accounts have been created, and over 5,000 titles are available. It took 5 months for the first million registrations and then we added 1 million more in the last 4 weeks. So at this point, other studios are releasing in UV, not just Warner. Universal, Sony and Paramount have done that. Both Wal-Mart and Amazon are now supporting UltraViolet, and we think other retailers will follow. And we think it's going to be more compelling as more companies and consumers participate. The question that I think you ended up with is, is it at the right price? We think the first step is to continue to make electronic sell-through product easy to use, easy to get, easy to understand, not intimidating for people to buy. We don't set the prices, but we're going to work with our retail partners who have every interest in making this successful and setting the right price that really satisfies consumers.

Operator

Our next question comes from Michael Nathanson from Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

I have one for Jeff. And then, John, just a housekeeping. So for Jeff, over the past couple of years, you've been very, very adamant in saying that when the syndicated shows go into an online streaming model, they have -- the sprockets run off of them, which hurts the long-term shelf value. So I wonder now that we had some time, and maybe some other people have different models out there about selling stuff into SVOD, I wonder if your thinking has changed about that, to what shows can be sold in and what happens to the value in SVOD.

Jeffrey L. Bewkes

Yes. As a starting point, we want to reiterate that we think, and we have all along, that there's clearly a role for SVOD in the ecosystem. And we are more than happy to work with SVOD companies to license our content. That's what we've been doing. But to your more precise question, which content should we license, what content is going to be optimized through SVOD licensing, our overarching goal, as we've always said, is simply to maximize the lifetime value of the content. And so let's go through what kind of things belong where. For the shows that are likely to have multiple cycles, one consideration is the potential impact of SVOD on the value of subsequent cycles. So, of course, if you've got something up on SVOD that runs the sprockets off, you're going to erode the value for those kinds of shows that have second and third cycle syndication. And as we all know, some of those big shows have huge second and third cycle values. So let's take an example like Big Bang Theory, which on -- look, we're not saying categorically, but it's unlikely if you look at the prospects for Big Bang Theory that it's going to go to an SVOD service at least anytime soon for a number of reasons. It obviously is commanding very high license fees from traditional networks and stations who want exclusive rights for those exhibitions. There is a very large barter component to that, which, of course, doesn't exist on SVOD as a source of monetization. And so in that case, trying to balance the value of later cycles. For older content that has either already gone through several cycles or for shows that are serialized -- they, therefore, don't have multiple cycles and they work better for viewers on a VOD basis -- serialized dramas would be a pretty good example. That's really not a concern, and those are the kind of things that you can be more efficient with when you put them on SVOD. We had -- for example, let's take The CW deal that we did, which was an SVOD sale to Netflix. And those shows had more efficient and higher value in an SVOD service, with a little earlier availability than we thought we could get in traditional syndicated buyers. So it really depends on the nature of the programming. And what's emerging, as we always thought it would, is basically an efficient market where the addition of SVOD makes content more valuable and where, last point, to quote traditional networks that used to buy syndicated products and you thought that all that was, was going to be available on a once-a-week or twice-a-week schedule, remember, all the traditional syndicated buyers, particularly cable networks, are now putting that product, think of the Big Bang Theory, on VOD given TV Everywhere. So you can watch it on TBS, multiple episodes.

John K. Martin

And, Michael, I'm sorry. He didn't ask the question or he did? Did you -- you said you had a question on...

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

No, I was going to say, John, could you just tell us how much Imagine lost last year? Have you seen seasonality to the losses?

John K. Martin

The losses last year for Imagine were around $70 million. We lost around $10 million in Q1. I don't remember the exact seasonality as we progressed through the year, but I think the losses grew bigger in the back half. But I don't remember exactly quarter-by-quarter. But in total, $70 million.

Operator

Our next question comes from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Jeff, I wanted to ask you 2 questions. One, just back to your prior comment on the kids market. And there's a lot of debate out there about the role of kids programming online versus in a linear format. And I'm curious if you think the decision by Nick, Nickelodeon to put content online has, at all, hurt cartoon or the overall ecosystem by just drawing eyeballs away. And then on HBO, sort of an unrelated question, I've always heard that as you move towards more on-demand consumption, whether it's GO or SVOD on HBO, that the viewing shifts more to originals and away from film content. And I'm wondering if that's still true. And if it is, would you consider shifting more of your investment capital away from output deals to originals, which actually could, in theory, drive some margins at HBO?

Jeffrey L. Bewkes

Yes. First question, do we think that having -- and you asked it in the case of kids. If you look at viewing in cable, cable actually continued to take share from broadcast. That's particularly true if you look in prime time. It was less clear in total day, and we think that the kind of last trend in cable viewing in total day was in kids viewing, when kids viewing went to SVOD rather than to watching the cable networks. Now Cartoon Network was up 14%. So we didn't have that problem, and we think part of the reason is that we don't have our program sitting on an SVOD service where parents can park their kids in front of an SVOD. And obviously, that's taking some viewing away from some of the other animated channels, which -- not ours, but theirs probably for that reason. We think the same thing if you don't ask in an animated and you look at regular TV programming. The more that it shows up on demand, on TNT and USA and CBS, and the less that it shows up on on-demand services with 100 episodes sitting there with a low commercial load, the more you're going to see the same thing. And that's why we -- our ratings for our shows and our kind of sales and rentals for TV shows that we then put out into the aftermarket do better so long as they're not overexposed someplace else. If you go to HBO, to your question, yes. When people use on-demand, they do use it for movies at HBO. And HBO has a really strong movie lineup that -- it's superior to any other pay TV network. But HBO also has an even greater advantage in terms of the depth and quality of its original series versus other pay TV. And so what happens in on-demand is people go and catch up and watch those series. So there is more original programming viewing in on-demand then there would be slightly. And it'll probably increase because HBO is in the process right now, as we said, of dramatically increasing the number of original series on HBO. What that leads to, to your question, should we -- would we want to drop a studio? We've said very clearly that the advantage HBO has, given the fairly large throw weight advantage we've got in movie deals and the large advantage in original series, that we have the luxury of choice of whether we want to drop a studio. And we're essentially going to evaluate that. First and foremost, for the power of our networks domestically and worldwide, because our originals fuel the worldwide business in HBO, not just the 40 million subs in America but 60 million-plus worldwide that are growing rapidly, that obviously lends to originals. And then the second consideration will just be economics. Is it worth it to us to spend whatever we decide to spend on theatrical films?

Operator

Our next question comes from Anthony DiClemente from Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

I have one for Jeff and one for John. First, Jeff, for films that have exited the post -- have exited the pay TV window. So they're being marketed on your online distributors like iTunes, like Amazon. I'm wondering if you see an acceleration at all of volume of electronic rentals given, really, in terms of rental market, you have so many more points of purchase in a digital world than you did in the old Blockbuster days. And then secondly, for John, it might be helpful, just given conversation around your affiliate fee renewals, to get some color on the cadence of those renewals? One of the -- when are the bulk of your Turner deals coming up for renewal? And maybe, could you even just talk a little bit about the drivers of your potential rights fee increases?

Jeffrey L. Bewkes

Yes, that -- okay, I didn't understand the first -- You're asking what about electronic? Rental or...

Anthony J. DiClemente - Barclays Capital, Research Division

Yes, I'm just asking about really the split between -- within electronic sell-through, the split between ownership and rental. It seems like in a mobile tablet world, the consumer with all this content having the ability to be stored in the cloud might choose to rent as opposed to own more so. And I understand the economics aren't as good as the sell-through market, but maybe you make it up on volume because you've got so many hundreds of millions of mobile devices out there. And maybe that's what happens because of all the incremental touch points as opposed to a finite number of rental video stores back in the old days.

Jeffrey L. Bewkes

Okay, now I understand. Yes. Well, passing VOD, the statement we made which is true, that electronic sell-through was quite robust this quarter, and going to your point, why would consumers want to buy something if rental and availability of films gets more easy, so they don't need to own it. It's a good question. It's going to have some -- it will depend on how easy it is to, when you own something, a film, to management -- to manage it, get access to it and think that it's important for you to have it that way. It'll depend on the price, as I think your question implies. And basically, then you get to the habit that people have had where they have, whether it's in books, music, TV shows or films, there is a tendency for people to collect and to want to own and have available. And as you -- whatever the movie is. Even if you say to yourself, as your question implies, "Well, why do I need to own it? I can get it anytime." Although there is a kind of an emotional reaction that if I'm going to have to rent it every time and cost me, I'd rather own it. So you get back to that really trade off in people's minds, the ease of having it on the shelf. Now, on the shelf means in the cloud, the ease of being able to give it to your kids 8x. It kind of depends on the genre. There are plenty of genres you can imagine. Animated for young kids is one, comedies for -- 10s, 20s and 30s is another one where people watch them over and over. And so they don't want to rent them, they want to own them. And then there's some kind of things they love that could be dramas or big epics where they really want to own that and have it in their home. So I think it's going to evolve. If you look for data points, to your question, and look at iTunes, which is obviously electronic sale and rental, 60% of the money is still purchase versus rental. Similar to what we had in physical. But we're not saying to you that we know the -- I think your question is an intelligent one. I don't mean to say that patronizingly. We all have the same question, where is this going to go? If we make the ownership realities for our average consumer easy and rewarding, and if rental continues to get better and easy to use, right now rental is easy to use than ownership, we'll just have to see it unfold. And I think pricing -- to the extent that there's pressure on ownership, if pricing moves to motivate ownership, then I think your question's exactly right, where the volume makes up for whatever price adjustment needs to occur.

John K. Martin

It's John. Let me to provide a little bit more context for -- I think you used the word cadence as it relates to our affiliate renewal cycle. But obviously, I'm going to have to fall short of providing a tremendous amount of transparency because we have confidentiality provisions around most, if not all, of our agreements. If you look at -- we've already been in the market, and we've done some deals as it relates to those networks that are covering March Madness. And what we have seen, by virtue of having done those deals, is it's only underscored and increased our confidence in our ability to get the type of rate increases that we think bring TBS, TNT and truTV up closer to fair value. And we have every intention to try to drive rate aggressively to get fair value over time. The majority of those rate renewals will come into effect -- well, they'll all be in effect before the end of 2016, but they'll be on the first material step-up beginning in 2014. If you look at Turner in total this year, there aren't any major contract renewals. Next year, there are certain contract renewals for Networks, including CNN and Cartoon Network. And we feel confident in our ability to drive rate there as well. So I think we are very, very confident in the long term affiliate fee outlook that we've got the pricing increases that we've been able to garner. And recent deals have only underscored our confidence, and they've all been at much higher rates than we've gotten in the most recent rate renewal cycles, if that makes sense. In other words, the increases -- yes, the rate increases that we're getting now are higher than the rate increases that we got before. And we have every intention to try to get our networks closer to where we believe fair value is going forward.

Operator

Our next question comes from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC, Research Division

Your sub fee growth in the quarter was 5%. You've answered a couple of questions talking about the growth that's going to come from renewals. But also wondering, historically, one of the biggest drivers for all of the cable network industry has been new distributors. And wondering how you think about the evolution of new distributors over the next few years. There's the prospect we're hearing more and more of people talking about non-facilities-based distributors, these so-called virtual MVPDs. If people come to you and want to license all of your channels and pay you at the top end of your rate card, how do you feel about that risks, rewards. How do you think about what that could do above and beyond the accelerations you're going to get from the core renewals you talked earlier about?

Jeffrey L. Bewkes

Well, there are many aspiring entities that do come forth and we want to offer that. And we do talk with them in detail and as constructive a way as we can. We're willing to look at anything that makes sense provided that it, in fact, does provide long-term sustainable distribution. And one of the major issues when you evaluate that is number one, are the economics additive? I think you said it well when you said, look, those people, in order to win programming rights from established well-distributed networks, are going to try to offer wholesale money that is at the top end of what goes on right now in the industry. But the question for whether they're going to be able to pay that is whether offering consumers anything that's really valuable to consumers and whether they're going to be able to deliver quality transmission of network programming. Think of it high-def, think of it on-demand and what that takes, and how they're going to do that over the distribution plan. So we're all looking at that as are the existing distributors. Whether it's cable operators, the telcos, DirecTV and DISH, all trying to figure out how to continue to move forward, offering consumers the kinds of packages that they want, whether it's over the traditional video broadcasting that they've used or over Internet protocol. So it's an open subject. Right now, we don't see -- we haven't seen any particularly viable "virtual MSOs" that would appear to us to have a sustainable ability to deliver a benefit to consumers. But if we see one of those, then we would be open to figuring out whether that would work on a long-term basis.

Richard Greenfield - BTIG, LLC, Research Division

And then could I just follow up on Hulu? How do you think a Hulu-authenticated model could work for you?

Jeffrey L. Bewkes

Well, we think Hulu authenticating makes sense. We think the authenticating of -- the authentication of the programming inside Hulu, which is basically nbc.com, fox.com, abc.com make sense also, obviously because they're trying to strengthen their economic base by adding a carriage fee. And so if that's -- it's perfectly consistent with having a carriage fee to have the programming available on demand but in an authenticated way, whether it's on nbc.com or fox.com or whether it's on Hulu, which is the aggregation of those. We think Hulu's heading in the right direction now, and it might be useful -- continue to be viable.

One quick one for John. John, what would advertising revenue growth in the quarter be if TNT ratings didn't decline? And then one for Jeff. Jeff, you spoke pretty often about how there is a gap between general entertainment, cable networks, CPM and broadcast networks. And I was wondering if you could tell us if you see that gap contracting over the past couple of years and if there is still an opportunity for further contraction? And would it be easier for you now to drive pricing, now that TBS rating has stabilized and hopefully, TNT will stabilize soon?

John K. Martin

Actually -- it's John. Let me try to address your question, although I'm not exactly sure how to answer it. Clearly, if TNT's ratings were higher, our ad revenues would be higher. We'd be delivering greater gross rating points, and we'd be monetizing our inventory at higher levels. I'm not going to try to characterize to you exactly the materiality of that because I think, in some respects, and we've talked about this before, over any near term and even medium term, the correlation between ratings and ad revenues isn't always perfectly correlated. So there's lots and lots of things that go into the determination of ad revenues, and it has to do with yield managements, sponsorships, mix of inventory, type of demographics that the networks are delivering. But overall, it's clearly a drag on ad revenues, and we would anticipate our ad revenue pacings to improve as we progress throughout the year in line or trend-wise with the stabilization and hopefully, improvement with TNT's ratings.

Jeffrey L. Bewkes

And I think you asked about what is the difference in price for CPM between cable and broadcast?

On what it was contracting? It has been contracting very gradually over the last 3 or 4 years. We think it's -- we see it continuing. But it still is 20 or more percent, depending on the data point.

John K. Martin

I think it also -- just add a little bit there, there are certain elements of programming where the CPMs are essentially at parity now. But there are certain elements of programming, particularly scripted originals in prime where the premium that broadcast garners is materially higher than what cable is getting. So there's a real opportunity to continue to drive that gap narrowing.

Operator

The next question comes from Doug Mitchelson from Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Two jump ball questions for Jeff and John. First, should investors consider that timing -- taking back control of its online properties from the Networks group anyway makes it easier to undertake strategic actions with that segment? And then on HBO, with content better than ever, how should we think about the impact on profitability over time from the strong original content lineup? Is that something that directly drives 2012 EBITDA growth? Should we think about a delayed impact because we have to wait for syndication sales maybe in '13? Or are you actually reinvesting the increased value and it's really a longer-term EBITDA impact? That'd be helpful.

Jeffrey L. Bewkes

First of all, what we did in the online side of Turner and SI in sports, we had an idea that we could combine the Turner digital sports properties, which potentially exhibit, say, basketball, baseball, et cetera, kinds of things. With the Sports Illustrated site, which draws a lot of viewing to analysis and readership, coverage of every sport, what we found is we just weren't achieving much benefit because the synergy really is between the online and tablet and mobile platforms for SI articles and coverage with the magazine readership. And in the -- and it's not really with, let's say, a baseball game or a basketball game on Turner and exhibition. So we essentially went back to synergizing across the SI platform, print and digital, and the same thing in Turner Sports. None of that would have made or does make any difference in how we -- it's not material enough to change how we think about the operations of either Turner or Publishing in case we wanted to do something and allot one of them with somebody else. I would Just say, on that point, we think Publishing -- and we have a lead position in Publishing. It's a very good business that is core to us. It's got a pretty good return now. It's coming back up. The return on capital, if you exclude purchase price, is now back up into the mid-teens. So it's well ahead of its cost of capital. And while we are right now -- and it's a high cash flow generator. Right now, the whole publishing industry is facing kind of a stall in revenue. So it's not a good situation in the short run. But in the long run, we think there's quite a lot of upside in digital distribution of our publishing position, which is a -- we have a very strong lead position across a lot of areas in publishing. If you go to the HBO question, I think it's -- having a continuing increase in hit original programming and basically maintaining, as I think we do, the whip hand in access to theatrical films in their earliest window after home video puts HBO as a subscription VOD service in the strongest position worldwide. And as we now have a go on GO, in other words, it's available over Internet delivery, it's increasingly available on that basis all over the world, you're going to see obviously, therefore, support in subscription revenue, support and increases in content revenue. Your question asked, or predicted the answer, when you make hit series, think of Game of Thrones right now, True Blood, et cetera, we're going to optimize the value. First, they go across our subscription networks worldwide and then we sell them when we think the time is right as either an electronic sale or a physical DVD sale. And those things are going to be pretty considerable because we have a pretty big backlog of successful series that haven't yet hit the revenue line or the profit line in HBO. So yes, it's coming. It's going to be a steady robust business from now on out.

John K. Martin

So just to give a sense because you were asking specific timing as well, if you think about 2012 HBO, go back to what I said in my prepared remarks. At HBO, our operating income growth is going to accelerate this year compared to last year. And as you look out over the next 9 months, content revenue is going to be up versus the 9 months from a year ago. So to underscore what Jeff said, we're building assets, and we're building assets that -- at a deeper pipeline that we're going to be able to monetize in numerous ways going forward. And the content revenue line is an important line.

Operator

The next question comes from Barton Crockett from Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I was interested in the discussion in Filmed Entertainment that revenue growth was partly attributable to subscription video on demand availability of television series. I was wondering if you could characterize to some degree the materiality of that? And tell us whether, to some degree, that was related to kind of The CW Netflix deal, and give us some sense of how material that might be for you guys going forward over the balance of the year.

John K. Martin

We had recognized in the quarter, we had about $75 million of SVOD money. And based on the deals that we've already got to date, that we've already contracted to date, we would anticipate this year 2012 to recognize somewhere in the area of about $200 million. And we've got constructive discussions ongoing with numerous other parties as more and more entrants seem to be interested in acquiring the types of shows that we have. So we've got a couple of hundred million dollars that we'll recognize to date. But we would assume that, that number's probably going to go up.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

And can you describe to us how we should think about the margin impact of those revenues as they come in?

John K. Martin

It's high.

Jeffrey L. Bewkes

Yes, no cost. Yes.

John K. Martin

Well, it depends on the deal. But generally speaking, considerably, considerably higher than the margin that we're -- that is the average margin for the overall segment, which is in low teens.

Operator

The next question is from David Miller from Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

Jeff, another follow-up question about UltraViolet. I know you mentioned price as an issue, but as I understand it, and just correct me if I'm wrong here, there's just a number of kinks that just need to be ironed out here. I mean, I don't believe you have one set-top box or game console yet supporting the service, and the software -- and please correct me if I'm wrong, that the software which is supposed to power the concept has proven largely ineffective on certain PC models. There's also the iTunes element. What are you guys doing to kind of iron out those kinks? And I know you mentioned that price is still an issue, and I know you answered that first question.

Jeffrey L. Bewkes

Well, if you would give me your address, I'll come to your house and I'll wire up all those devices. Sorry to joke about it, but you’re on to a good question, which is -- look, we -- you got -- we're the studios that own the content. We're setting up a template that makes it easier for every kind of device maker, interface maker, software runner and retailer from Wal-Mart to Target, et cetera, to support and line up with getting you exactly and every consumer the kind of on-site unscrambling of the wires that we all know is life in the 21st century. So I think when you have everyone aligned in an offering, then those problems will get solved. And I think those are important problems to solve. It's early in the -- it's early. This is 1.0, I guess we would say. So the content is there. Now the interface companies or functions with real people have to take place. So that's step 2, and that's what's happening this year. And I think that'll pick up speed. Because consumers are going to love this, and they're going to demand that they get solutions to those at-home problems.

Douglas Shapiro

All right. Thanks, everybody, for dialing in. Sorry about that technical glitch at the beginning, and we'll talk to you soon.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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